Westpac, St.George merger yields below expectations

Westpac head still optimistic on bank's performance next year as economic conditions improve.

Westpac managed a net $3.44bn, down 11 percent, and - from what we can see - that was bang on what the banking gadflies expected.

The second-half result of $1.27bn - down 42 percent - reflects a $703 million increase in tax provisions, following the bank's recent court loss in NZ relating to structured financing transactions, as reported in the Australian.

The bank's operating income (revenue) line push to boost its retail deposit base (up 17 percent) also reaped rewards. But flat net interest margins in the second half show that loan re-pricing is only just keeping pace with rising wholesale funding costs.

An underrated feature of Westpac is management's ability to integrate its St.George Bank merger without inciting mass protests from customers in dragon costumes. A year into the merger, the dual branding strategy is working: Gail Kelly even claims some customers don't know it's happened. But surely it's only a matter of time before the operations are combined (that's what bank mergers are for). While keeping the St.George flock happy, merger savings of $143m have come in 19 percent ahead of the expected run rate.

Kelly dubs the result as a sound one during a tumultuous year, and who can disagree? The bank expects loan impairments to ease in 2010. "Our third quarter was the worst quarter for impairments and we have seen stabilisation in the fourth quarter," Kelly said.